Inflation erodes the purchasing power of your money. That’s because a dollar will buy less now than it did in the past, and it costs more to meet human needs with one paycheck. That’s why understanding how inflation affects you is so important.
Inflation is measured by tracking price changes for a basket of goods and services. Government agencies, such as the Bureau of Labor Statistics in the US, publish a variety of price indices that help policymakers, business leaders, and consumers track general price movements. The best known is the Consumer Price Index (CPI), which tracks the prices of a set of goods and services purchased by urban consumers. Other measurement indices, such as the Personal Consumption Expenditures (PCE) price index from the Bureau of Economic Analysis, include more broader spending categories.
Businesses care about inflation because it may force them to raise their own prices to keep up with higher raw materials and labor costs. Companies can also benefit from inflation if it boosts demand for their products. However, when inflation is out of control, it can cause problems for all kinds of stakeholders.
Inflation has a number of causes, including demand pressures from rising population and growing incomes in developing countries, increased supply constraints due to shortages of raw materials and natural disasters, and disruptions in global markets. High inflation can also be caused by “cost-push” factors, whereby the rising price of inputs like raw materials and transportation fuel pushes up the price of final goods or services. For example, egg prices surged during the COVID-19 pandemic as a result of bird flu killing a lot of hens.